                         T.C. Memo. 1998-7



                      UNITED STATES TAX COURT


             EUGENE D. LANIER, INC., Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          EUGENE D. AND ERIE P. LANIER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 9146-93, 9171-93.    Filed January 7, 1998.


     Elmo J. Laborde, Jr., for petitioners.

     Emile L. Hebert III and Linda J. Bourquin, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     WRIGHT, Judge:   In these consolidated cases, respondent

determined deficiencies in, and additions to, the Federal income

taxes of petitioners Eugene D. Lanier, Inc. (the Corporation) and

Eugene D. and Erie P. Lanier (the Laniers) for taxable year 1987

in the following amounts:
                                  - 2 -

                           Docket No. 9146-93

                                                 Addition to Tax
     Tax Year                Deficiency          Sec. 6661(a)
     1987                    $63,128             $22,734


                           Docket No. 9171-93

                                                 Addition to Tax
     Tax Year                Deficiency          Sec. 6661(a)
     1987                    $88,370             $22,093

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue.       All

Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, the issues remaining for decision are as

follows:    (1)   Whether the fair market value (FMV) of certain

real property sold to the Laniers by their wholly owned

Corporation exceeded its purchase price; and (2) whether the

Laniers received a constructive dividend in the amount of $13,000

as a result of the Corporation's transfer of that sum to their

son's election campaign committee.

                            FINDINGS OF FACT

     Some of the facts have been stipulated and are found

accordingly.      The stipulation of facts and attached exhibits are

incorporated herein by this reference.     The Corporation was

domiciled in Youngsville, Louisiana, at the time it filed its

petition.    The Laniers were married and resided in Youngsville,

Louisiana, when they filed their petition.
                                - 3 -

I.   Sale of the Property

     Beginning in 1969, the Corporation was a franchised Toyota

automobile dealership d/b/a Acadian Toyota.     The Corporation

leased property located at 3203 Johnston Street in Lafayette,

Louisiana, from 1969 to 1978.   In August 1978, the Corporation

acquired the property and improvements located at 5001 Johnston

Street, Section 64, T10S-R4E, in Lafayette (the Property), for

$566,034 and moved to that address.     Beginning in 1979, the

Corporation was also a franchised Volvo automobile dealership

d/b/a Acadian Toyota-Volvo.

     During the taxable year 1987, the Laniers were the

Corporation's sole shareholders.   G. Talbott Robertson

(Robertson), a certified public accountant, informed the Laniers

in late 1986 that a "precipitous" decline in real estate values

in Lafayette presented the potential opportunity to transfer

ownership of the Property from the Corporation to the Laniers

without incurring a large tax cost.     To that end, Robertson

encouraged the Laniers to seek an appraisal of the Property.

     The Corporation hired Warren G. Monies (Monies) to appraise

the Property.   On February 16, 1987, Monies issued an appraisal

report which estimated the FMV of the Property to be $424,085 as

of that date.   Mr. Lanier said that at the time he "thought it

[the appraisal] was low."

     After receiving Monies' appraisal, the Laniers instructed

their attorney to use the selling price of $425,000 in a Credit
                               - 4 -

Sale executed on March 31, 1987, by which the Property was

transferred to the Laniers.   The Laniers assumed the mortgage on

the Property (which had a balance of approximately $293,000),

paid $55,000 in cash, and executed a promissory note in favor of

the Corporation in the principal amount of $77,000.

     The Corporation reported the disposition of the Property on

its 1987 Form 1120, U.S. Corporation Income Tax Return, as being

a sale for an amount equal to its adjusted basis in the Property

as of March 31, 1987, or $423,468.     Accordingly, the Corporation

did not report any gain or loss on the transaction.    Likewise,

the Laniers did not report any income on their joint 1987 Form

1040, U.S. Individual Income Tax Return, as a result of their

purchase of the Property.

     The Corporation's earnings and profits for taxable year 1987

were $62,581.   The Corporation had accumulated earnings and

profits as of January 1, 1987, totaling $622,124.

     From March 31 to September 28, 1987, the Property was owned

by the Laniers, but the premises were leased to the Corporation

at a rate of $10,000 per month.   The Corporation continued to own

and operate its franchised Toyota and Volvo automobile

dealerships until September 28, 1987.    On that date, the

Corporation ceased being a franchised Toyota and Volvo automobile

dealership d/b/a Acadian Toyota-Volvo and sold its assets to

Harvey, Inc. (Harvey).   Also on that date, the Laniers and Harvey

entered into a 10-year lease for the Property with an option in
                               - 5 -

favor of Harvey for an additional 10 years.   The payments called

for under the lease were $15,000 per month for the 10-year term

commencing September 28, 1987, and $10,000 per month during the

option term if the lease were renewed.   Such payments in part

reflected the sale of the dealership's assets to Harvey.

     As of the sale date, the Property was a rectangular corner

parcel with frontage on 3 streets, namely Johnston Street (U.S.

Highway 167), Gerald Drive (formerly Whittington Terrace

Boulevard) and Empire Drive.   The Property was legally described

as follows:

     that certain tract of land, together with all
     improvements thereon, situated in Section 64, Township
     10 South, Range 4 East, Ward 8, Lafayette Parish,
     Louisiana, having a front on U.S. Highway 167, Johnston
     Street, of 283.9 feet with a rear line of 286 feet, a
     depth on the Northeast line of 316.8 feet and a depth
     on the Southwest line of 310.6 feet. This parcel
     contains approximately 2.05 acres, or 89,389 square
     feet. * * *

     The Property included a large metal-framed sales and service

building consisting of approximately 13,495 square feet for the

building area and 3,499 square feet for the attached canopies.

This main building contained the sales and accounting offices,

parts department, storage and service bay areas, and restrooms.

The Property also included a smaller woodframed, galvanized

metal-clad building (housing the paint and body shop) consisting

of approximately 2,510 square feet, as well as a 68,699 square-

foot asphalt-paved lot for new and used car display, storage, and

customer parking.   In addition, the Property contained two
                                - 6 -

underground storage tanks.    One was a double-walled tank for

gasoline storage and the other was a single-walled tank for waste

oil.    Storage tanks were essential to the operation of an

automobile dealership with a service area.

       The main building was constructed in 1978; in 1987 it had an

effective age of 10 years and an estimated remaining economic

life of 35 to 40 years.    The paint and body shop building had

been moved to the site from a previous dealership; by 1987, it

had been refurbished and expanded and is considered to have the

same approximate age characteristics as the main building.

       As of March 31, 1987, the zoning classification for the

Property was Zone BG-General Business.    This   classification

permitted a wide range of commercial uses.    The flood zone

designation of the Property was FEMA Flood Hazard Zone C, the

area of minimal inundation.

       Johnston Street is the principal northeast-southwest traffic

artery for the City of Lafayette.    The Property is located in the

southwestern section of Lafayette, approximately one-half mile

northeast of the intersection of Johnston Street and Ambassador

Caffery Parkway.    At the time of sale, the Johnston Street

corridor in which the Property is situated was a primary

commercial corridor in Lafayette.

       Of all the metropolitan centers in Louisiana, Lafayette was

the hardest hit by the deep recession in the oil and gas industry

during the 1980's, losing roughly 22 percent of its jobs between
                               - 7 -

1983 and early 1987.   The recession was severest during 1985

through 1987, with the lowest point occurring during the first

quarter of 1987.

      In 1985, 1986, and 1987, at least several prominently

located vacant land tracts were available for sale and/or

development in the vicinity of the Property.     However, none of

those parcels were sold during this period.     Moreover, the market

value for all classes of improved commercial real estate had

steadily declined, and there was an excess inventory of

commercial office, retail, and industrial buildings.     Sales of

such properties by repossessing lenders were common in 1987.

The availability of financing for new development was minimal at

this time, and development reached a virtual standstill.

      On March 31, 1987, if the Property had been vacant land, the

highest and best use of the Property would have been to hold it

for future commercial development.     As then improved, however,

the highest and best use of the Property was as an automobile

dealership.

II.   The Corporation's $13,000 Transfer to Vance E. Lanier, Inc.

      Vance E. Lanier (Vance) is the Laniers' son.    He was an

officer of the Corporation in 1987.     Vance was also a candidate

for Representative for District 43 of the Louisiana House of

Representatives in the election held on October 24, 1987.     Vance

E. Lanier, Inc., d/b/a the Committee to Elect Vance Lanier (the

Committee), was duly incorporated under the laws of Louisiana.
                               - 8 -

Vance was the chairman of the Committee and Robertson was its

treasurer.

     The Committee was organized primarily for the purpose of

accepting contributions and making expenditures to effect Vance's

election to public office.   Robertson insisted upon the corporate

form of the Committee due to the limited liability from creditors

that such a structure afforded.   The Committee maintained its own

bank account into which contributions were deposited and from

which campaign expenditures were paid.   The Committee kept its

own accounting and financial records, and filed campaign finance

reports with the State of Louisiana.

     Prior to his son's candidacy, Eugene D. Lanier had been

actively involved in numerous political campaigns and had made

frequent monetary contributions thereto.   The Corporation had

also made contributions to numerous political candidates

antedating Vance's campaign.   On September 29, 1987, the

Corporation lent funds to the cash-strapped Committee.   A check

in the amount of $13,000 was issued to "Vance Lanier, Inc." by

Acadian Toyota-Volvo, a division of the Corporation.   The check

was endorsed "Vance E. Lanier, Inc., Committee to Elect Vance

Lanier" and was designated "for deposit only."   The Committee

used the proceeds of the loan to pay for various campaign

advertising expenses.

     The primary election for District 43 was held on October 24,

1987.   Vance was not one of the top two candidates in the primary
                                 - 9 -

election and therefore did not qualify for the general election

held on November 21, 1987.

     On October 30, 1987, after the primary election had taken

place, the Corporation determined that there was no realistic

possibility that its loan to the Committee would be repaid.

Accordingly, the Corporation converted the loan to the Committee

into a political contribution.    The Corporation reported the

contribution as one of a number of nondeductible expenditures on

a Schedule M-1, Reconciliation of Income per Books With Income

per Return, attached to its 1987 return.

     All of the moneys the Committee had classified as loans in

its State campaign finance reports were ultimately reclassified

as cash contributions; none of the loans were ever repaid.

Neither the Laniers nor Vance received any cash distributions

from the Committee.   The Committee did not assume any of Vance's

or the Laniers' debts, nor did it pay any of their personal or

educational expenses.   In addition, neither the Laniers nor Vance

used any Committee property for their own personal benefit.

     On February 11, 1993, respondent issued notices of

deficiency to the Corporation and the Laniers.    In the notices of

deficiency, respondent determined that the FMV of the Property

was $640,000 on March 31, 1987.    Respondent further determined

that the selling price of the Property equaled its book value in

the hands of the Corporation--$423,468.    Among other things,

respondent made adjustments to income of $216,532 for both the
                              - 10 -

Corporation and the Laniers, which amount reflected the

difference between the FMV and the selling price/book value of

the Property determined by respondent.   Respondent also

determined that petitioners were liable for additions to tax

pursuant to section 6661(a) for a substantial understatement of

income tax.

      Respondent subsequently conceded that neither the

Corporation nor the Laniers are liable for additions to tax

pursuant to section 6661(a) for the taxable year 1987.     Moreover,

respondent conceded at trial that the FMV of the Property was

$620,000 rather than $640,000 as previously determined.

Respondent further conceded that the Property's selling price was

$425,000.   Finally, the parties have agreed that $24,370 of the

Corporation's net operating loss for 1989 remains available to be

carried back to the Corporation's taxable year 1987 if it is

decided that the Corporation failed to report taxable income

equal to or greater than that amount for 1987.

                              OPINION

     We must decide the FMV of the Property.   We must also decide

whether the transfer of $13,000 to the Committee by the

Corporation results in the imputation of a constructive dividend

to the Laniers.

I.   Did the FMV of the Property exceed $425,000?

      Section 311(b)(1) provides that if a corporation distributes

its property to its shareholder at a time when the FMV of the
                               - 11 -

property exceeds the property's adjusted basis in the hands of

the distributing corporation, the corporation must recognize a

gain as if the property were sold to the shareholder at its FMV.

     Section 1.301-1(j), Income Tax Regs., provides that when an

individual shareholder purchases property from a corporation for

an amount less than the property's FMV, the shareholder may be

deemed to have received a distribution to which section 301

applies, i.e., a dividend, to the extent the FMV exceeds the

amount paid by the shareholder for the property.   See Palmer v.

Commissioner, 302 U.S. 63, 69-70 (1937); Green v. United States,

460 F.2d 412, 419 (5th Cir. 1972); Brittingham v. Commissioner,

66 T.C. 373, 409-410 (1976), affd. per curiam 598 F.2d 1375 (5th

Cir. 1979).

     The term "dividend" is defined in section 316(a) as a

distribution of property by a corporation to its shareholders out

of its earnings and profits.   Dividends are includable in the

gross income of a shareholder to the extent of the corporation's

earnings and profits for the calendar year when the dividend is

paid, along with accumulated earnings and profits.   See secs.

301(c)(1), 316(a); Truesdell v. Commissioner, 89 T.C. 1280, 1294-

1295 (1987).   There is no requirement that the dividend be

formally declared or even intended by the distributing

corporation.   Sachs v. Commissioner, 277 F.2d 879 (8th Cir.

1960), affg. 32 T.C. 815 (1959).
                               - 12 -

     The parties do not dispute that the sale of the Property, if

found to be below FMV, results in additional income to both the

Corporation and the Laniers.   (In that respect, the Laniers do

not deny that the Corporation had adequate earnings and profits

to support the finding of a dividend in the amount determined by

respondent.)   The principal issue, therefore, is primarily

factual; i.e., whether or not the FMV of the Property as of March

31, 1987, exceeded its purchase price of $425,000.

     FMV has been defined as 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.    United States v.

Cartwright, 411 U.S. 546, 551 (1973); Marine v. Commissioner, 92

T.C. 958, 982 (1989), affd. without published opinion 921 F.2d

280 (9th Cir. 1991); see sec. 1.170A-1(c)(2), Income Tax Regs.

The FMV of property is based upon the "highest and best use" of

the property as of its relevant valuation date.    Stanley Works &

Subs. v. Commissioner, 87 T.C. 389, 400 (1986); see Hilborn v.

Commissioner, 85 T.C. 677, 689 (1985).    The determination of the

FMV of property is a question of fact which must be resolved

after consideration of all of the evidence in the record.     Morris

v. Commissioner, 761 F.2d 1195, 1200 (6th Cir. 1985), affg. T.C.

Memo. 1982-508; Jarre v. Commissioner, 64 T.C. 183, 188 (1975);

Kaplan v. Commissioner, 43 T.C. 663, 665 (1965).
                              - 13 -

     Petitioners bear the burden of proving that respondent's

determination of FMV is incorrect.1    Rule 142(a); Estate of

Gilford v. Commissioner, 88 T.C. 38, 51 (1987); Burbage v.

Commissioner, 82 T.C. 546, 560 (1984), affd. 774 F.2d 644 (4th

Cir. 1985).   A transaction between a sole shareholder and his

corporation is not an arm's-length transaction and is subject to

special scrutiny.   Ingle Coal Corp. v. Commissioner, 174 F.2d

569, 571 (7th Cir. 1949), affg. 10 T.C. 1199 (1948); Estate of

Schneider v. Commissioner, 88 T.C. 906, 938 (1987), affd. 855

F.2d 435 (7th Cir. 1988); Yamamoto v. Commissioner, 73 T.C. 946,

954 (1980), affd. without published opinion 672 F.2d 924 (9th

Cir. 1982).

     Respondent now contends that the Corporation is deemed to

have recognized income under section 311 in the amount of

$196,532 due to the sale of the Property ($620,000 FMV less the

Corporation's adjusted basis).   Respondent also argues that the

Laniers must recognize additional income under sections 301 and

316 in the amount of $195,000 ($620,000 FMV less the purchase

price).   Petitioners, on the other hand, maintain that the FMV of

the Property was $425,000.   On that basis, petitioners argue that

they did not receive a constructive dividend.    Petitioners

     1
        In response to petitioners' argument, we observe that the
fact that respondent has reduced the claimed valuation of the
Property from that set forth in the notices of deficiency,
without more, does not suffice to relieve petitioners of the
burden of proof on this issue. Estate of Smith v. Commissioner,
57 T.C. 650, 656 (1972), affd. 510 F.2d 479 (2d Cir. 1975).
                              - 14 -

further assert that the Corporation has already recognized as

income the $1,532 difference between the Property's claimed FMV

of $425,000 and the Corporation's adjusted basis therein, and

that no additional income must be recognized by the Corporation

under section 311(b)(1).

     The parties primarily rely upon their experts' testimony and

reports to support their respective positions regarding the FMV

of the Property.   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.   Estate of Newhouse v.

Commissioner, 94 T.C. 193, 217 (1990); Parker v. Commissioner, 86

T.C. 547, 561 (1986); Johnson v. Commissioner, 85 T.C. 469, 477

(1985).   We are not bound, however, by the opinion of any expert

witness when that opinion contravenes our judgment.     Estate of

Newhouse v. Commissioner, supra at 217; Parker v. Commissioner,

supra at 561.   Although we may accept the opinion of an expert in

its entirety, Buffalo Tool & Die Manufacturing Co. v.

Commissioner, 74 T.C. 441, 452 (1980), we also may be selective

in the use of any portion thereof, Parker v. Commissioner, supra

at 562.   Consequently, we take into account expert opinion

testimony only to the extent that it aids us in arriving at the

FMV of the property.
                               - 15 -

     There are 3 basic methods used to value real property and

other assets:   (1) The market-data, or sales comparison,

approach; (2) the replacement-cost approach; and (3) the

capitalization-of-earnings approach.    See Marine v. Commissioner,

supra at 983.

     The market-data approach entails a comparison of the subject

property to similar properties sold in the same time frame and

geographic area.   Differences which make a comparable property

superior or inferior to the subject property are accounted for by

adjusting the sale price of the comparable property downward or

upward, respectively.    See Estate of Spruill v. Commissioner, 88

T.C. 1197, 1229 n.24 (1987); Estate of Korman v. Commissioner,

T.C. Memo. 1987-120.    The validity of this valuation method

depends to a great degree upon the comparables selected and the

reasonableness of the adjustments made thereto.    See Wolfsen Land

& Cattle Co. v. Commissioner, 72 T.C. 1, 19-20 (1979).

     The replacement-cost approach begins with an estimation of

the value of the underlying land and then adds the cost of

constructing equivalent improvements thereupon as if the

improvements were new.    From this figure is subtracted the amount

that the existing improvements have diminished in value due to

physical depreciation or obsolescence.    Marine v. Commissioner,

supra at 983.

     The capitalization-of-earnings approach to valuation is

premised on the theory that the value of property correlates with
                                  - 16 -

its expected income-producing power.       In simple terms, under this

approach, value equals net annual operating income divided by a

capitalization rate.    The capitalization rate is influenced by

many factors.    Although basically related to the rate of

interest, it also includes risk and liquidity factors and a

recapture of capital component.      See Narver v. Commissioner, 75

T.C. 53, 90 n.17 (1980), affd. 670 F.2d 855 (9th Cir. 1982).       The

selection of a capitalization rate represents the appraiser's

subjective determination of the anticipated return on capital

invested in the property.     The lower the rate of capitalization,

the higher the estimate of property value will be.      See Estate of

Korman v. Commissioner, supra.

     A.     Respondent's Expert

     Respondent relies principally upon the report and testimony

of J. Harold Lambert (Lambert), a self-employed certified general

real property appraiser.     Lambert's report was prepared in

October 1994.     The parties have stipulated that Lambert is an

expert.     Lambert utilized the replacement-cost, market-data, and

capitalization-of-earnings approaches in appraising the value of

the Property as of March 31, 1987.

     Under the replacement-cost approach, Lambert viewed 5 vacant

land sales (vacant land sales) as comparables, to which he made

adjustments for such factors as location, corner influence, and

size.     He valued the land at $3.50 per square foot, or $313,000

(rounded).     He then determined the direct cost of the
                               - 17 -

improvements to be $521,111 using the Marshall and Swift Cost

Manual.   To that figure he added certain indirect costs of

$14,106 and an "entrepreneurial fee" of $114,500.   (Lambert

described an entrepreneurial fee as a "soft cost" charged by the

coordinator/developer of a project for the time and risk involved

in bringing it to fruition.)   Thus, Lambert's estimate of the

replacement cost new for the improvements was $649,717.   Lambert

then estimated total depreciation, including physical

depreciation and external obsolescence, to be $259,887.   Adding

together the value of the land and the estimated depreciated cost

of improvements, Lambert valued the Property at $702,800.

     For the market-data approach, Lambert chose 5 sales of

improved properties (improved sale), all of which were automobile

dealerships, as comparables.   The unit of comparison was the

price paid per square foot of gross building area, including

land.   He made adjustments for such factors as location, age and

condition of the improvements, and size.   Under this method,

Lambert estimated the value of the Property at $636,300, rounded.

     Under the capitalization-of-earnings approach, Lambert

examined the lease rates for 9 properties (lease comparable).

He estimated a rental rate for the Property of $6 per square foot

and a gross building area of 13,980 square feet which, after

expenses, yielded a net annual operating income for the Property

of $76,295.   Lambert then used the mortgage-equity band of

investment technique to estimate a capitalization rate of 12.45
                               - 18 -

percent.    He arrived at a value for the Property of $612,800

(rounded).

     After analyzing the values derived under each of the above

approaches, Lambert determined that the FMV of the Property was

$620,000.

     For the reasons discussed below, we conclude that Lambert's

report is filled with shortcomings and errors which, in sum,

prove fatal to his conclusion regarding the FMV of the Property.

See Wolfsen Land & Cattle Co. v. Commissioner, 72 T.C. at 21 ("we

note that the reliability of this expert's opinion was severely

compromised by several errors in his calculations which surfaced

during the trial held herein.").

     Lambert analyzed a total of 19 transactions to support his

valuation of the Property as of March 31, 1987, yet 15 of those

transactions had not transpired as of the valuation date.    Among

the dispositions taking place after the sale of the Property,

Vacant Land Sale No. 5 occurred on September 30, 1988.    Improved

Sale No. 3 did not take place until November 1988.    (A sale of

the same property at a lower price, which Lambert did not

consider in his analysis, had occurred in November 1986.)

Improved Sale No. 2 did not take place until October 31, 1990.

Improved Sale No. 4 did not occur until February 1989.    Moreover,

Lease Comparables 4 and 8 did not commence until September 1991.

Lease Comparable 5 was not in effect until May 6, 1993.    Lease

Comparable 6 was not entered into until June 30, 1992.
                               - 19 -

     Events occurring subsequent to the valuation date are not

considered in determining FMV of the property, except to the

extent the events are reasonably foreseeable on the valuation

date.    See First Natl. Bank of Kenosha v. United States, 763 F.2d

891, 893-894 (7th Cir. 1985); Estate of Spruill v. Commissioner,

88 T.C. at 1228.   However, this Court has drawn a distinction

between subsequent events which affect the value of the property

and those which merely provide evidence of such value on the

valuation date.    See Estate of Jung v. Commissioner, 101 T.C.

412, 431 (1993).   Subsequent events which affect the value of the

property (such as the discovery of oil on the real property) can

be taken into account only if they are reasonably foreseeable on

the valuation date.    Estate of Jung, supra.   Conversely,

subsequent events which merely provide evidence of the value of

the property on the valuation date can be taken into account

regardless of whether they are foreseeable on the valuation date.

Estate of Jung v. Commissioner, supra.    In considering such

events, appropriate adjustments must be made for changes in

inflation, general economic conditions and other similar factors.

Estate of Jung v. Commissioner, supra.

     The mere fact that the comparables used by Lambert are

subsequent in time to the valuation date is not fatal to

Lambert's determination.2   See Estate of Smith v. Commissioner,

     2
         We are not discrediting Lambert's use of the comparables
                                                    (continued...)
                               - 20 -

57 T.C. 650, 659 n.8 (1972), affd. 510 F.2d 479 (2d Cir. 1975)

(Provided they are not too far removed from the * * *

[valuation] date, sales before and after such date may be used to

corroborate the ultimate determination of * * * [FMV].)     While

comparables entered into subsequent to the valuation date can be

used, adjustments need to be taken into account to reflect market

changes between the comparable's date of sale and the valuation

date.    In this case, Lambert did not make any time adjustments.

Under the replacement-cost approach, Vacant Land Sale No. 5 was

used, but Lambert did not make any market condition adjustment to

reflect the 18 months that transpired after the valuation date.

Under the market-data approach, Improved Sales No. 2, 3, and 4

were used, but again Lambert did not make any adjustment for

market condition and time.    Lambert merely concluded that no

clear evidence existed to make an adjustment.    With the

capitalization-of-earnings approach, Lease Comparables No. 4, 5,

6, and 8 were used.    In making his determination, Lambert used

the current rental rates, which covered the following periods:

September 1991 to September 1996 for Lease Comparable No. 4; May

1, 1993 to April 30, 1998 for Lease Comparable No. 5; January 1,

1993 to December 31, 1997 for Lease Comparable No. 6; and

September 1, 1991 (annual lease) for Lease Comparable No. 8.     At

     2
      (...continued)
mentioned. For example, Vacant Land Sale No. 5 is a reliable
comparable because it is located in the Johnston corridor and it
is similar in size and shape to the Property.
                              - 21 -

trial, Lambert admitted he should have used an earlier lease for

Lease Comparable No. 4 in effect on March 31, 1987 (which changed

the rental rate from $5.24 in 1991 to $3.38 in 1987).

     We think that the use of these comparables without relevant

adjustments for market conditions and time was inappropriate in

light of the "precipitous" decline in real estate values in

Lafayette in late 1986 and the fact that the recession in

Lafayette was severest during 1985 through 1987, with the lowest

point occurring during the first quarter of 1987 when the

transfer of the Property occurred.     Because the validity of an

expert's determination depends upon on the comparables selected

and the adjustments, Wolfsen Land & Cattle Co. v. Commissioner,

72 T.C. at 19-20, we discount Lambert's determination of the

Property's FMV.

     Moreover, 10 of the transactions used by Lambert in his

appraisal report took place outside of the Lafayette market.     Of

those transactions, Lease Comparables 1 and 2 were located in

Sulphur, Louisiana.   Lease Comparable 3 was in Lake Charles,

Louisiana.   Lease Comparables 5, 6, 8, and 9 were in Baton Rouge,

Louisiana.   Lease Comparable 7 was in Gonzales, Louisiana.

Lambert does not provide any information in his report that the

lease rates in these various markets were similar to those in

Lafayette; he himself stated that the Lafayette market suffered

the most in Louisiana due to the recession.     Thus, we conclude
                              - 22 -

that the foregoing transactions are not reliable in determining

the Property's FMV.

     Lambert made other analytical errors as well.   Among the

more noteworthy, Vacant Land Sale No. 2 was not actually vacant

but contained a metal warehouse and small office building.

Lambert assigned a value of only $10,000 to these 2 buildings,

which had the effect of inflating the amount paid for the

underlying land.   He neither inspected the interiors nor measured

the dimensions of the buildings.   He viewed the buildings only

through a fence from adjoining property.   We do not think that

this transaction is a reliable indicator of FMV.

     Furthermore, as mentioned above, Lambert included an

entrepreneurial fee of $114,500 under the replacement-cost

approach.   We believe that such a fee is inappropriate given the

depressed economic situation in Lafayette at the time of sale.

Lambert himself acknowledged that, as of March 31, 1987, had the

land been vacant, it would not have been feasible for an

entrepreneur to have constructed buildings of the type on the

Property.

     Equally troubling in our view are the numerous and

substantial alterations Lambert made to the data contained in his

report at trial.   Among other things, Lambert reduced the

estimated value per square foot of Vacant Land Sale No. 3 from

$2.45 to $1.89 after acknowledging that he had used the wrong

size of the parcel in his initial estimate.   For Lease Comparable
                                   - 23 -

No. 6, he reduced the rental rate from $7.02 to $6.24 per square

foot.     For Lease Comparable No. 7, he lowered the rental rate

from $6.63 to $5.62 per square foot.        Lambert changed a zero

percent adjustment for Improved Sale No. 2 to negative 10 percent

to reflect market conditions.       For Lease Comparable No. 4, he

changed the $5.24 rental figure to $3.28 per square foot.

Lambert deleted Lease Comparable No. 9 entirely from his report

at trial.

     Despite the numerous changes to his data, affecting each of

the approaches Lambert used to determine value, Lambert

incongruously refused to alter his final estimated FMV for the

Property.     Under the circumstances, we think this is

inappropriate.

     B.     Petitioners' Experts

        Petitioners rely upon the reports and testimony of two

certified general real property appraisers, George Parker

(Parker) and Rodolfo J. Aguilar (Aguilar), both of whom the

parties stipulated are experts.       (Prior to trial, respondent

filed a motion in limine requesting that the Court not admit into

evidence appraisal reports prepared by Monies dated February 16,

1987, and December 1, 1987, as Monies died before trial and

therefore could not be cross-examined by respondent as to the

factors Monies considered in his valuation of the Property.          The

Court granted respondent's motion on March 13, 1995.)
                              - 24 -

     Parker relied on the replacement-cost, market-data, and

capitalization-of-earnings approaches in appraising the value of

the Property at $420,000 as of March 31, 1987.    In appraising the

Property at $490,000, Aguilar used the replacement-cost and

capitalization-of-earnings approaches, but opted against using

the market-data approach.   Petitioners maintain that their

experts have established a reasonable range of values for the

Property and that the purchase price of $425,000 falls within

that range.

     Parker's report was prepared in August 1994.   For the

replacement-cost approach, Parker estimated the value of the

underlying land to be $125,000 (rounded), using 6 vacant land

sales as comparables ($1.40 per square foot times 89,380 square

feet).   He then estimated the 1987 reproduction cost new of the

buildings and other improvements at $610,616.    Accrued

depreciation (incurable physical deterioration and external

obsolescence) was estimated at $303,673, for an estimated

depreciated cost of the improvements of $306,943.    Thus, his

estimate of value under this approach was $432,000 (rounded).

     For the market-data approach, Parker analyzed 3 sales of

automobile agencies in Lafayette.   The sales were adjusted to

account for physical characteristics.   He estimated the value to

be $420,000 under this approach.

     Finally, using 4 lease comparables (including leases of

Improved Sales Nos. 1, 2, and 3 entered into after the purchases
                              - 25 -

of those properties), Parker valued the Property by capitalizing

its earnings.   He estimated the Property's net annual operating

income to be $51,000 ($3 per square foot rental rate times a

gross building area of 16,994 square feet).    Using a

capitalization rate of 12.2 percent, he valued the Property at

$418,000.

     After considering all 3 approaches, Parker finally settled

on a value for the Property of $420,000.

     We think that Parker's report contains several flaws which

caused him to value the Property incorrectly.    Among other

things, Parker neglected to include the 2,510 square-foot paint

and body shop in his estimate of annual net operating income

under the capitalization-of-earnings approach.    Inclusion would

necessarily have increased net operating income and, therefore,

the FMV of the Property.   Furthermore, Parker made no size

adjustments for any of the vacant land sales, even though 5 out

of the 6 parcels were larger than the Property.    We believe that

size adjustments should have been made in valuing the Property;

Aguilar and Lambert agreed that smaller parcels generally sell

for a higher price per square foot than larger parcels.    In

addition, Parker made no market change and time adjustments for

Improved Sale Nos. 2 and 3, which occurred on November 11, 1988,

and January 23, 1990, respectively.    We conclude that Parker's

use of Improved Sales Nos. 2 and 3 without any adjustment for
                               - 26 -

market change and time under the market-data approach was

inappropriate.

     Furthermore, Parker viewed Land Sale No. 2 as an arm's-

length transaction even though it was actually a sale of an

undivided half-interest in property between a mother and

daughter.   Transactions between family members are not arm's-

length transactions and are subject to special scrutiny.    Harwood

v. Commissioner, 82 T.C. 239, 258 (1984), affd. without published

opinion 786 F.2d 1174 (9th Cir. 1986); Estate of Whitt v.

Commissioner, T.C. Memo. 1983-262, affd. 751 F.2d 1548 (11th Cir.

1985).   Respondent's expert Lambert stated that, as no money was

actually transferred between the two parties, it should not be

viewed as a comparable sale.   We find Lambert's testimony on this

point credible, and we agree with his conclusion.

     Finally, Parker deducted $450,000--an amount equal to half

of the purchase price--from Land Sale No. 1 for superior market

conditions with no explanation as to how he arrived at a

deduction of such magnitude.

     Petitioner's second expert, Aguilar, prepared his report in

October 1991.    For the replacement-cost approach, Aguilar used 6

land sales as comparables, which he then adjusted for size, date

of sale, and corner influence.   Aguilar valued the underlying

land at $268,167, or $3 per square foot.   Aguilar looked only at

land sale comparables as of March 31, 1987; he did not look at

sales occurring after that date.   Aguilar then estimated the
                               - 27 -

reproduction cost new of the improvements using the Marshall

Valuation Service.    The total, including land value, was

$988,973.   From that figure, he subtracted accrued depreciation

(physical depreciation and external obsolescence) totaling

$453,759 to arrive at a value of the subject Property of

$535,215.

     For the capitalization-of-earnings approach, Aguilar used 3

lease comparables to estimate market rent.     Two lease comparables

were located in Baton Rouge.    One lease comparable was the

sublease of 3203 Johnston Street to Courtesy Motors by Mr.

Lanier.   Aguilar determined a lease rate for the Property of

$2.90 per square foot.    This resulted in an annual gross

operating income of $60,000, given Aguilar's estimation of the

Property's gross building area of 20,690 square feet.     No

expenses were subtracted from this figure since Aguilar assumed a

net lease for the Property.    Capitalization at a rate of 11.83

percent yielded a value of $507,059 for the Property.     From that

figure, Aguilar subtracted the estimated cost to remove the 2

underground storage tanks of $50,000 to arrive at a value of

$457,000 (rounded).

     Aguilar decided against using the market-data approach in

part because he concluded that reliable comparable sales data on

improved properties was unavailable.

     Aguilar's report contains several flaws which preclude us

from accepting it in its entirety.      Among other things, Aguilar
                              - 28 -

did not adequately explain the adjustments he made under the

replacement-cost approach.   Moreover, Aguilar did not make any

adjustments for zoning restrictions, flood zone designation, or

location.   Aguilar claimed that flood zone classifications would

affect his estimate of value only if the properties in fact faced

a substantial flooding problem.   However, we think that a buyer

would pay less per square foot for vacant land required to be

filled to a certain height before improvements could be

constructed, regardless of whether the land actually floods, than

for vacant land of similar appeal that does not need to be so

filled.   In addition, we find it questionable that Aguilar made

no location adjustments for any of the 6 vacant land properties

despite the fact that the Property was located in a primary

commercial corridor, and the comparables were not so situated.

Finally, Aguilar included an entrepreneurial fee in his

replacement-cost approach which, for reasons discussed earlier,

we find inappropriate.

     In addition to the above shortcomings, respondent contends

that Aguilar's deduction for the cost of removal of the two

underground storage tanks under both approaches is in error.    We

agree with respondent on this point.   In taking the deduction,

Aguilar (who is a registered environmental property assessor)

argued that the underground storage tanks represented a potential

risk for a prospective purchaser.   Aguilar opined that a would-be

buyer would verify that the underground tanks necessary for his
                                - 29 -

automobile dealership business were installed in accordance with

the latest EPA regulations to insure that no leakage or

contamination of the soil was possible.       Aguilar based his

$50,000 deduction on the cost to remove the tanks in the absence

of any contamination of the soil.

     We think that such a deduction in this case is not

reasonable.    Previously, this Court has stated that it may be

appropriate to discount the value of real property for the

presence of underground storage tanks, which pose a hazardous

waste problem, provided that the amount of the discount is

properly quantified.    See Estate of Pillsbury v. Commissioner,

T.C. Memo. 1992-425.    In that case, we opined that "The question

to be decided is whether a hypothetical buyer * * * with

reasonable knowledge of the relevant facts, would have discounted

the value of the * * * property".     Id.    We did not sustain a

discount for possible contamination because neither the appraiser

nor the taxpayer believed further investigation was necessary

before stating a value for the property, and no evidence was

presented from which such a discount could be determined.

     In this case, as a starting point, we look to the Property's

highest and best use as a car dealership.       The underground

storage tanks (one for gasoline and one for waste oil) are

essential to the operation of an automobile dealership on the

Property.     There is no evidence that the soil of the Property was

contaminated as of March 31, 1987.       Further, Aguilar stated in
                                - 30 -

taking his deduction he assumed that the Property was not

contaminated.    In light of no contamination and the needed

presence of the tanks, Aguilar has not convinced the Court that a

hypothetical buyer with reasonable knowledge of the facts would

have discounted the value of the Property due to the presence of

the tanks.    Therefore, we find Aguilar's deduction for removal of

the tanks to be inappropriate.    See Estate of Necastro v.

Commissioner, T.C. Memo. 1994-352 (where taxpayer failed to prove

that a buyer purchasing the property on the valuation date would

have perceived the possibility of contamination as a problem

causing a reduction in value).

       Having carefully reviewed the experts' testimony and

appraisal reports, and having accepted none of the experts'

reports in their entirety, we must now proceed to determine the

FMV of the Property on the facts before us.

       For the reasons which follow, we think that the

capitalization-of-earnings approach is the most suitable method

of valuation in this case.    See Honigman v. Commissioner, 55 T.C.

1067 (1971), affd. in part, revd. in part and remanded 466 F.2d

69 (6th Cir. 1972); Gottlieb v. Commissioner, T.C. Memo. 1974-

178.    No sales of vacant land occurred in the Johnston Street

corridor from 1985 through the valuation date, despite being

offered.     Moreover, at the time of sale, there was a shortage of

lending in Lafayette for development.    In that connection, the

experts all agreed that the highest and best use of the Property,
                                - 31 -

if it had been vacant land, would have been to leave it for

future development.   Thus, the replacement-cost method is

unpersuasive in our view.    See Honigman v. Commissioner, supra;

Gottlieb v. Commissioner, supra ("We think it unrealistic to

determine fair market value by * * * cost of reproduction when

such structure would not have been reproduced.").

     Furthermore, we agree with Aguilar that the market-data

approach is unjustified here.    The sales of improved properties

brought to the Court's attention by Lambert and Parker are simply

not comparable to the subject Property in our view for the

reasons mentioned earlier.

     On March 31, 1987, as then improved, the highest and best

use of the Property was as an automobile dealership.       Using the

capitalization-of-earnings approach, we begin with a gross

building area for the Property of 19,504 square feet.       This

figure represents the 16,994 square feet used by Parker, plus the

2,510 square-foot paint and body shop that he neglected to

include in his analysis.    We next estimate a rental rate for the

Property of $3.25 per square foot.       This rate is approximately

the same as that for the 3203 Johnston Street property used as a

lease comparable by all 3 experts.       3203 Johnston Street was

sublet in April 1988 at $36,000 per year with a gross building

area of 10,875 square feet, for a rate of $3.31 per square foot.

In response to respondent's argument, we do not consider the

$10,000-per-month lease rate between the Laniers and Harvey to be
                                - 32 -

a comparable lease, as it in part reflected the sale of the

automobile dealership to Harvey.     Nor do we consider the $10,000-

per-month lease between the Laniers and the Corporation to be a

comparable lease, as it did not represent an arm's-length

transaction.    See Ingle Coal Corp. v. Commissioner, 174 F.2d 569,

571 (7th Cir. 1949), affg. 10 T.C. 1199 (1948).     Our estimated

lease rate for the Property incorporates a positive adjustment

for location, corner influence, and physical condition, and a

slightly greater downward adjustment for size and market

condition.     This yields a gross annual income of $63,388.   No

expenses are subtracted from that amount, as we agree with

Parker's and Aguilar's assumption of a net lease for the

Property.    Moreover, we think that a capitalization rate of 12

percent is reasonable.     It falls squarely within the range of

11.83 to 12.45 percent determined by the experts.     This produces

a final estimated FMV for the Property of $528,233.

     While the record contains no reference to the exact dollar

figure of FMV determined by the Court, it is well settled that

     Valuation * * * is necessarily an approximation * * *.
     It is not necessary that the value arrived at by the
     trial court be a figure as to which there is specific
     testimony, if it is within the range of figures that
     may properly be deduced from the evidence.

Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir. 1957),

affg. in part and remanding for computational matters T.C. Memo.

1956-178; see McGuire v. Commissioner, 44 T.C. 801, 810-811

(1965).   That is the situation here.
                               - 33 -

     Having concluded that the FMV of the Property as of the date

of sale was $528,233, it follows that the Laniers are in receipt

of a constructive dividend in the amount of $103,233 (FMV less

purchase price), and we so hold.     Secs. 301(c), 316(a); sec.

1.301-1(j), Income Tax Regs.

     Finally, we note that Robertson testified that he chose the

book value of the Property as the selling price on the

Corporation's 1987 return as an "administrative shortcut."

Robertson opined

     The difference in the selling price between the book
     value and the--whatever it actually sold for was put
     into other income in connection with the sale of the
     whole business. It had not one penny's effect on
     taxable income, the bottom line, or the income tax due.
     Absolutely none.

However, Robertson could not point out where the difference was

purportedly taken into income on the Corporation's return.

Consequently, petitioners have failed to convince the Court, as

is their burden, that the Corporation has already taken into

income on its 1987 return the $1,523 difference between the sale

price of $425,000 and its adjusted basis in the Property.     Rule

142(a).   Therefore, we hold that the Corporation must recognize

income in the amount of $104,765 (FMV less the Corporation's

adjusted basis).   Sec. 311(b)(1).    The Corporation may apply its

1989 net operating loss of $24,370 in its entirety in order to

partially offset its 1987 taxable income.     Sec. 172.
                              - 34 -

II. Did the Laniers receive a constructive dividend as a result
of the Corporation's $13,000 transfer to their son's election
campaign committee?

     We now turn to whether the Laniers received a constructive

dividend in the amount of $13,000 on account of the Corporation's

transfer of that sum to Vance E. Lanier, Inc., on September 29,

1987.

     Section 61(a)(7) provides that gross income includes

dividends.   As mentioned previously, "dividend" is defined in

section 316(a) as a distribution of property made by a

corporation to its shareholders out of its current and/or

accumulated earnings and profits.

     It is well established that expenditures made by a

corporation for the personal benefit of its shareholders may

result in the receipt by the latter of constructive dividends.

Nicholls, North, Buse Co. v. Commissioner, 56 T.C. 1225, 1238

(1971); Ashby v. Commissioner, 50 T.C. 409, 417 (1968).     The

classification of an expenditure as a constructive dividend is a

question of fact.   Hardin v. United States, 461 F.2d 865, 872

(5th Cir. 1972); Lengsfield v. Commissioner, 241 F.2d 508, 510

(5th Cir. 1957), affg. T.C. Memo. 1955-257.   In order to be so

classified, the benefit provided by the Corporation must

primarily advance the shareholder's personal interest as opposed

to the business interests of the corporation.   Ireland v. United

States, 621 F.2d 731 (5th Cir. 1980).   However, the mere fact

that payments are not deductible by the corporation as a business
                               - 35 -

expense does not automatically result in constructive dividends

to a shareholder.    Ashby v. Commissioner, supra at 418.    The

corporation must also have conferred an economic gain or benefit

on the shareholder or a member of the shareholder's family as a

result of the corporation's transfer, without expectation of

repayment.   See United States v. Smith, 418 F.2d 589 (5th Cir.

1969); Falsetti v. Commissioner, 85 T.C. 332, 356-357 (1985);

Knott v. Commissioner, 67 T.C. 681, 693-694 (1977); Ellington v.

Commissioner, T.C. Memo. 1989-374, affd. 936 F.2d 572 (6th Cir.

1991).    Petitioners bear the burden of proving that respondent's

determination of a constructive dividend is erroneous.      Rule

142(a).

     In the instant case, the question remaining is whether the

payment from the Corporation to the Committee also resulted in a

demonstrable economic benefit to Vance, such that a constructive

dividend may be imputed to the Laniers.

     Respondent argues that because Vance was the only candidate

supported by the Committee, he was the only possible beneficiary

of the expenditures made by the Committee.   Respondent cites

Epstein v Commissioner, 53 T.C. 459 (1969), Johnson v.

Commissioner, 74 T.C. 1316 (1980), and Hufnagle v. Commissioner,

T.C. Memo. 1986-119, in support of this position.   Conversely,

petitioners argue that no economic benefit inured to Vance, as

the funds were used to satisfy the obligations of the Committee,
                                - 36 -

a separate legal entity.    Petitioners cite Knott v. Commissioner,

supra, in support of their position.

     In Epstein v. Commissioner, supra, the stockholders in a

corporation established separate trusts for the benefit of their

minor children.    On the same day, each of the newly created

trusts made bargain purchases of real property owned by the

corporation.    The Court held that the transfers of the property

interests from the corporation to the trusts, to the extent of

the bargain purchases, were constructive dividends to the

stockholders.     Id. at 475.

     In Johnson v. Commissioner, supra, a stockholder/director of

a bank established a trust naming his grandchildren as principal

beneficiaries and his wife, son, and daughter-in-law as

successive income beneficiaries.    Subsequently, the bank procured

split-dollar life insurance policies naming the stockholder as

the insured and paid the premiums therefor.    The proceeds of

those insurance policies were payable to the bank to the extent

of the net cash value of the policies at the time of the

shareholder's death, with the remaining policy proceeds being

payable to the trust.    This Court found that the shareholder had

received an economic benefit from the bank's payment of the

premiums on the insurance policies and held that he had received

constructive dividends to the extent of such benefit.     Id. at

1324.
                              - 37 -

     In Hufnagle v. Commissioner, T.C. Memo. 1986-119, a

corporation made payments to three colleges for the educational

expenses of the shareholder's children.    Although the children

were directors of the corporation at the time, the Court found

that the payments were not made for bona fide corporate purposes

but were made in satisfaction of parental desires.    We held that

the payments constituted constructive dividends to the

shareholder, as we found that an economic benefit had inured to

the shareholder and his children.

     We think that the facts of the cases relied upon by

respondent are distinguishable from those before us.    In each of

the above cases, demonstrable economic benefits accrued to the

shareholders and/or their family members from the transfers of

funds by the controlled corporations.   Corporate funds were used

to provide for the maintenance, support, or education of the

family members, in satisfaction of obligations with which they or

the shareholders would otherwise have been saddled.

     By contrast, in the instant case, although it is true that

expenses for Vance's campaign were paid as a result of the

Corporation's contribution, these obligations were the liability

of the Committee alone.   Nothing in the record suggests that

Vance personally guaranteed these debts.    Robertson insisted upon

the corporate form for the Committee precisely because of the

limited liability from creditors it offered.
                                - 38 -

     The corporate form is not to be disregarded lightly, and the

Court declines to do so here.    See Moline Properties, Inc. v.

Commissioner, 319 U.S. 436 (1943).       We note in this regard that

the Committee maintained its own bank account and kept its own

accounting and financial records.    In addition, the check from

the Corporation was endorsed "Vance E. Lanier Inc., Committee to

Elect Vance Lanier" rather than by Vance personally, and the

funds were deposited in the Committee's own account.

     We believe that the facts of Knott v. Commissioner, supra,

while not identical to those of the present matter, are

nonetheless analogous.   In that case, a corporation and its

controlled subsidiaries made below-market sales of real estate to

its shareholders' eponymous charitable foundation.      The

shareholders did not receive money or other property from the

corporations; their personal debts were not assumed by the

corporations; the corporations did not purchase and maintain

property for the shareholders' personal use and enjoyment; and

the shareholders' family members did not obtain property or other

tangible economic benefits as a result of the below-market sales.

We held that controlling shareholders or their families must

receive property or other economic benefit from the charitable

contributions before constructive dividends will be imputed.       Id.

at 693-694.

     While we are aware that the Committee was not a charitable

foundation, for our present purposes we think that a political
                             - 39 -

organization is substantially similar.   The most striking fact in

both cases is that, notwithstanding the personal desires of the

shareholders, the demonstrable economic benefit of such advances

accrued to legally distinct entities, and the distributions in no

way satisfied the personal obligations of the shareholders or

their families.

     Based on the above discussion and in light of all of the

evidence in the record, we hold that the Laniers are not in

receipt of a constructive dividend as a result of the $13,000

transfer by the Corporation to the Committee.

     We have considered all of the other arguments made by the

parties, and, to the extent we have not addressed them, find them

to be either irrelevant or without merit.

     To reflect the foregoing and the issue previously conceded,



                                         Decisions will be entered

                                   under Rule 155.
