                       T.C. Memo. 1998-413



                     UNITED STATES TAX COURT



          LOUISE B. BARNES, DONOR, ET AL.,1 Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 13850-96,   13851-96,   Filed November 17, 1998.
                 13852-96,   13856-96,
                 13857-96,   13896-96,
                 14049-96,   14050-96.



     David D. Aughtry and David W. Siegel, for petitioners.

     Eric B. Jorgensen and Amy Campbell, for respondent.




     1
       Cases of the following petitioners are consolidated
herewith: John M. Barnes, Donor, docket No. 13851-96; Edwin L.
Barnes, Donor, docket No. 13852-96; Frank S. Barnes, Jr., Donor,
docket No. 13856-96; Mary Anne G. Barnes, Donor, docket No.
13857-96; Jean D. Barnes, Donor, docket No. 13896-96; Vera W.
Helmly, Donor, docket No. 14049-96; and Robert L. Helmly, Donor,
docket No. 14050-96.
                                  -2-

              MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners' gift tax for 1992 as follows:

          Taxpayer           Docket number          Deficiency

     Louise Barnes               13850-96            $169,039
     John M. Barnes              13851-96             169,143
     Edwin L. Barnes             13852-96             169,039
     Frank S. Barnes, Jr.        13856-96             196,226
     Mary Anne G. Barnes         13857-96             196,226
     Jean D. Barnes              13896-96             169,143
     Vera W. Helmly              14049-96             133,350
     Robert L. Helmly            14050-96             133,350

     The issues for decision are:

     1.    Whether the fair market value of Home Telephone Co.

voting common stock in January and December 1992 was $389 per

share, as respondent contends; $216.56 per share, as petitioners

contend; or some other amount.    We hold that it was $227.41 per

share.

     2.    Whether the fair market value of Rock Hill Telephone

Co. nonvoting common stock in December 1992 was $410 per share,

as respondent contends; $186.55 per share on December 22, 23, and

26, 1992, and $179.03 per share on December 30, 1992, as

petitioners contend; or some other amount.    We hold that it was

$201.12 per share on December 22, 23, and 26, 1992, and $193.34

per share on December 30, 1992.

     Section references are to the Internal Revenue Code in

effect for the year in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.
                                  -3-

                         I.   FINDINGS OF FACT

A.   Petitioners

     Petitioners lived in South Carolina when they filed the

petitions in these cases.

     Edwin L. Barnes and Louise Barnes are married.      Frank S.

Barnes, Jr., and Mary Anne G. Barnes are married.      John M. Barnes

and Jean D. Barnes are married.     Edwin, Frank, and John Barnes

are brothers and are the children of Francis May Barnes and Frank

S. Barnes, Sr.     They are the grandsons of E.L. and Mary Sanders

Barnes.

     Ladson A. Barnes, Sr., who was one of three sons of E.L.

Barnes, died on March 11, 1984.     Ladson A. Barnes, Jr., was the

son of Ladson A. Barnes, Sr.

     Vera W. Helmly and Robert L. Helmly (the Helmlys) are

married.

B.   Rock Hill Telephone Co.

     Rock Hill Telephone Co. (Rock Hill) was organized in 1894

under the laws of South Carolina.       It is primarily engaged in the

business of providing local telephone service in the city of Rock

Hill, South Carolina, and in York and Chester counties.
                                  -4-

     1.   Ownership of Rock Hill

     At all times relevant to this case, Rock Hill had

outstanding 80,000 shares of voting stock2 and 164,760 shares of

nonvoting common stock.3   The members of Rock Hill's board of


     2
       On Dec. 22, 1992, immediately before the gifts in
question, the voting common stock of Rock Hill was held as
follows:

     Shareholder                  Number of shares   Percentage

Estate of Ladson A. Barnes              33,348          41.69%
Edwin L. Barnes                         13,866          17.33
John M. Barnes                          13,867          17.33
Frank S. Barnes, Jr.                    13,867          17.33
Rebecca B. Francis, Trustee              3,000           3.75
  for Ladson Barnes, Jr., Trust
Oma W. Barnes                            1,655           2.07
Ladson A. Barnes, Jr.                      397            .50
  Total                                 80,000         100.00%
     3
       On Dec. 22, 1992, immediately before the gifts in
question, the nonvoting common stock of Rock Hill was held as
follows:

     Shareholder               Number of shares      Percentage

Estate of Ladson A. Barnes               68,198         41.39%
Edwin L. Barnes                          18,893         11.47
John M. Barnes                           18,156         11.02
Frank S. Barnes, Jr.                     18,198         11.05
Rebecca B. Francis, Trustee                   0             0
Oma W. Barnes                             3,262          1.98
Ladson A. Barnes, Jr.                     6,340          3.85
Edwin L. Barnes, Jr.                      1,536          0.93
Mary Lea B. Tyler                         1,645          1.00
                                                      (continued...)
                                 -5-

directors were Frank Barnes, Jr., John Barnes, Willard K.

Gaillard, Edwin Barnes, and Ladson Barnes, Jr.

     In 1912, E.L. Barnes acquired the stock of Rock Hill.       Rock

Hill has been owned and operated by the Barnes family for more

than 80 years.   The Barnes family has taken steps (described

below) to preserve its control of Rock Hill.     There have been no

sales of Rock Hill common stock since 1912.

     Frank Barnes, Jr., and Edwin Barnes began working for Rock

Hill in 1946.    Frank Barnes, Jr., was president, chief executive

officer, and chairman of the board of directors in 1992.    Edwin

Barnes was its secretary and treasurer in 1992.    John Barnes was

one of Rock Hill's vice presidents in 1992.

     Four members of the fourth generation of the Barnes family

(i.e., great-grandchildren of E.L. Barnes) worked for Rock Hill



     3
      (...continued)
Estate of Francis M. Barnes             13,642           8.28
Charles Douglas Barnes                   1,831           1.11
Anne B. Grant                            1,645           1.00
Bryant G. Barnes                         1,620           0.98
Frank S. Barnes, III                     1,620           0.98
Mary Anne G. Barnes                        430           0.26
Louise B. Barnes                           580           0.35
Susan Sanders Barnes                     1,500           0.91
Frances Talbert Barnes                   1,536           0.93
Jean D. Barnes                             430           0.26
John M. Barnes, Jr.                      1,831           1.11
J. Barnes, Jr., & C. Barnes,
  Trustees                                 338           0.21
Jean S. Barnes                           1,493           0.91
Susan B. Ellis                              36           0.02
  Total                                164,760         100.00%
                                -6-

in 1992.   A member of the fifth generation works for Fort Mill, a

subsidiary of Rock Hill.

     2.    The Voting Trust

     Frank Barnes, Jr., and his brothers intend to keep Rock Hill

as a family owned business.   They control Rock Hill through a

voting trust.   Frank Barnes, Sr., created the voting trust on

April 30, 1964, to ensure that 52 percent of Rock Hill's voting

stock would vote as a unit.   Frank Jr., Edwin, and John (the

Barneses), are the trustees of the trust and together own 52

percent of the voting stock of Rock Hill.

     In 1992, the Barneses considered forming a holding company

to ensure that Rock Hill would remain in the family.    They also

bought insurance (at a time not stated in the record) to avoid

being required to sell shares of Rock Hill to pay death taxes.

     3.    Rock Hill's Affiliates and Subsidiaries

     In 1992, Rock Hill owned the following percentage of common

stock in Fort Mill Telephone Co., Lancaster Telephone Co., and

Home Telephone Co.:

                                              Percent owned
                                              by Rock Hill

Fort Mill Telephone Co. (Fort Mill)                  48.0%

Lancaster Telephone Co. (Lancaster)                  49.2

Home Telephone Co. (Home)                            49.8
                                 -7-

     The Fort Mill, Lancaster, and Home service areas are

predominantly rural.    The Fort Mill and Lancaster service areas

are contiguous.    Fort Mill provides service in York county.

Lancaster provides service in Lancaster and Chester counties.

Home is located in Moncks Corner, South Carolina, and provides

services in parts of Berkeley, Dorchester, and Orangeburg

counties.

     Rock Hill has three television cable company subsidiaries:

Great Falls Cablevision, Inc.; Carolina Telecom Services, Inc.;

and Winnsboro/Ridgeway Cablevision, Inc.    It also has three

wholly owned subsidiaries (Associated Data Services, Inc.;

Stenseth Directory Service, Inc.; and Associated Telecom, Inc.),

that provide services to the cable television and

telecommunications industry.

     4.     Telephone Services Provided by Rock Hill

     In 1949, Rock Hill converted its local service network to

dial service.    It installed electromechanical toll switching

equipment in 1968, and began offering touch tone service in 1971.

     Rock Hill replaced all of its electromechanical switching

equipment with digital electronic switching equipment between

1981 and 1990.    After it installed digital equipment, Rock Hill

offered new services including call waiting, call forwarding, and

conference calling.    Rock Hill was converting from copper wires

to fiber optics technology in December 1992.
                                  -8-

     Rock Hill had capital expenses of $5,605,184 in 1987,

$5,410,879 in 1988,4 $13,199,725 in 1989, $14,605,033 in 1990,

and $6,340,042 in 1991.

     Rock Hill's rates for local telephone service and special

products are set by the South Carolina Public Service Commission

(SCPSC).     The SCPSC also regulates all intrastate service rates.

     Rock Hill maintained 36,820 access lines on December 31,

1991.     Each of these lines has access to inter-exchange carriers

such as AT&T, MCI, and Sprint.    Rock Hill also owns a 5-percent

interest in a consortium that provides cellular telephone service

in rural South Carolina.

     5.      Dividends

     From 1987 to 1992, Rock Hill paid common stock dividends as

follows:

                            Total amount        Dividends
             Year           of dividends        per share

             1987             $550,710            $2.25
             1988              660,852              2.70
             1989              709,804              2.90
             1990              819,946              3.35
             1991              893,374              3.65
                                                 1
             1992            2,937,120             12.00
     1
       This includes $8 for a special nonrecurring dividend which
Rock Hill declared on Dec. 29, 1992, payable on Dec. 30, 1992.


     4
       Rock Hill's financial statement for 1987 and 1988 audited
by KPMG Peat Marwick shows capital expenses of $5,410,879 for
1988. The audited financial statement for 1988 and 1989 shows
capital expenses of $5,680,152 for 1988. The record does not
explain the $269,273 difference.
                               -9-

C.   Home Telephone Co.

     1.   Ownership of Home

     At all times relevant to this case, Home had 77,960

outstanding shares of voting stock,5 and the members of Home's


     5
       Immediately before the gifts in question, Home common
stock was held as follows:

     Shareholder                      Number of shares       Percentage

Rock Hill                                  38,800               49.77%
Robert L. Helmly, Sr.                      11,772               15.10
Vera W. Helmly                              4,145                5.32
Edwin L. Barnes                             2,073                2.66
John M. Barnes                              1,890                2.42
Frank S. Barnes, Jr.                        1,626                2.09
D.C. Bishop                                 1,600                2.05
Estate of Harold H. Harvey                  1,600                2.05
F.M. and Winona Peagler                     1,200                1.54
Lisa Helmly                                 1,045                1.34
John C. Guerry, Sr.                         1,000                1.28
Wanda Helmly Davis                            840                1.08
Ladson A. Barnes, Jr.                         814                1.04
Richard E. Briscoe                            800                1.03
Robert L. Helmly, Jr.                         780                1.00
Rebecca B. Francis, Trustee                   721                0.92
William Shellie Helmly                        680                0.87
Sara Helmly Carroll                           505                0.65
Dozier H. Helmly                              500                0.64
Jewel O. Helmly                               500                0.64
Estate of Francis M. Barnes                   460                0.59
Bryant G. Barnes                              320                0.41
Frank S. Barnes, III                          320                0.41
Estate of Ladson A. Barnes                    320                0.41
George F. Briscoe                             320                0.41
Anne Fishburne Briscoe                        320                0.41
Richard E. Briscoe, III                       320                0.41
Mary Anne G. Barnes                           282                0.36
Stephen Shellie Helmly                        240                0.31
Winona H. Peagler                             228                0.29
Mary Elizabeth Williams Littlefield           160                0.21
Charles D. Barnes                             138                0.18
                                                         (continued...)
                                -10-

board of directors were Frank Barnes, Jr., John Barnes, Edwin

Barnes, Robert Helmly, and Dozier Helmly.

     Home was formed in 1904 in Moncks Corner.       It was later

incorporated as St. Johns Telephone Co. (St. Johns).       In 1916, a

local electric utility bought St. Johns.      Mary Winter Briscoe

(Briscoe) bought St. Johns and named it Home Telephone Co. in

1939.    Home had 150 subscribers at the beginning of World War II.

     In 1947, Briscoe sold Home to her daughter and son-in-law,

Thelma and S.S. Helmly, the parents of Robert Helmly, Sr.       At the

end of World War II, Home obtained a loan from the Rural

Electrification Administration to expand its services.       The loan

enabled Home to install its first dialing system.

     Robert Helmly, Sr., began to work for Home when he was

discharged from the Navy in 1953.      In 1962, Thelma and S.S.


     5
      (...continued)
John M. Barnes, Jr.                            138              0.18
Jean S. Barnes                                 137              0.18
Wandell K. Harvey                              116              0.15
Carroll H. Harvey                              114              0.15
Troy M. Harvey                                 114              0.15
Bennie H. Ordel                                114              0.15
Patricia H. Welch                              114              0.15
Lila G. Bobo                                   110              0.14
Edwin L. Barnes, Jr.                           104              0.13
Frances T. Barnes                              104              0.13
Susan S. Barnes                                104              0.13
S.A. or Virginia Helmly                        100              0.13
Mary Lea Tyler                                 100              0.13
Jean D. Barnes                                  82              0.11
Julie Elizabeth Helmly                          80              0.10
Melissa Grace Davis                             10              0.01
  Total                                     77,960            100.00%
                                 -11-

Helmly sold their shares of stock in Home to their sons Robert

and Dozier.     Robert is president and chief executive officer of

Home.     Dozier has been a director since 1979.

     In 1991, Dozier sold some of his Home stock back to the

company for $252 per share, an amount that was a little above

book value.

     In 1992, Home's largest shareholder was Rock Hill.

     2.      Telephone Services Provided by Home

     Home installed its first digital line in 1966.    By 1986, all

of Home's service was digital.

     Home maintained 14,718 access lines on December 31, 1991.

Each of these lines has access to inter-exchange carriers such as

AT&T, MCI, and Sprint.

     Home's local telephone services rates are set by the SCPSC.

     3.     Home Telecom, Inc.

     Home's wholly owned subsidiary, Home Telecom, Inc. (Home

Telecom), became a partner with another company (not otherwise

identified in the record) to provide cellular telephone service

in the Charleston Metropolitan Statistical Area (MSA).    Home

Telecom is a 25-percent nonmanaging partner in Charleston-North

Charleston MSA, L.P.    On December 31, 1991, Home Telecom had

about 10,160 customers.
                                   -12-

     4.      Dividends

     Robert Helmly has a conservative approach to paying

dividends.    He believes that Home's primary obligations are to

modernize its plant and to reduce its debt.    This philosophy is

similar to that of the management of Rock Hill.

     From 1987 to 1992, Home paid dividends to holders of its

common stock as follows:

                              Total amount     Dividends
           Year               of dividends     per share

           1987                 $155,920          $2.00
           1988                  210,445           2.70
           1989                  327,931           4.20
                                                1
           1990                1,247,360          16.00
           1991                  467,760           6.00
                                                2
           1992                1,325,230          17.00
     1
      This includes $12 for a special nonrecurring dividend
resulting from the sale of Home's interest in Telecom U.S.A.
     2
       This includes $13 for a special nonrecurring dividend
resulting from concerns about impending tax law changes.

D.   Petitioners' Gifts of Home and Rock Hill Stock

     The Helmlys made the following gifts of Home stock in 1992:

                                                    Percent of
No. of shares                   Donee                  stock

     Gifts on 1/28/92:

     100                 Wanda Helmly Davis               .128%
     100                 Lisa Ann Helmly                  .128
                                -13-


     Gifts on 12/29/92:

     800              Robert Helmly Jr., trust          1.03
     800              William Helmly trust              1.03
     800              Wanda Helmly Davis trust          1.03
     800              Robert Helmly Jr., trust          1.03
     800              William Helmly trust              1.03
     800              Lisa Ann Helmly trust             1.03
     800              Wanda Helmly Davis trust          1.03
     800              Lisa Ann Helmly trust             1.03
     100              Jason Cole Davis trust            .128
     100              Robin E. Helmly trust             .128
     100              Phallan Nicole Helmly trust       .128
     100              Arden Lin Helmly trust            .128
     100              William Travus Helmly trust       .128
     100              Preston Fhorest Helmly trust      .128
     100              Melissa Grace Davis               .128

     Mary Anne and Frank Barnes made the following gifts of Rock

Hill stock in 1992:

                                                       Percent of
No. of shares                 Donee                  nonvoting stock

     Gifts on 12/22/92:

    1,470             Frank S. Barnes III                .89%
    1,470             Bryant G. Barnes                   .89
    1,470             Anne B. Grant                      .89
    1,470             Mary Lea B. Taylor                 .89

     Gifts on 12/30/92:

       80             Rita B. Shaw trust                 .049
       80             James Bryant Grant trust           .049
       80             Benjamin Lea Grant trust           .049
       80             Catherine Iverson Grant trust      .049
       80             Michael Francis Taylor trust       .049
       80             Robert Graves Taylor trust         .049
       80             David Bryant Barnes trust          .049
       80             Emily Ann Barnes trust             .049
       80             Amanda Emily Barnes trust          .049
                                 -14-

     On December 30, 1992, Frank Barnes gave 6,000 shares of Rock

Hill nonvoting common stock to Mary Anne Barnes.   This stock was

about 2.45 percent of the total authorized and issued common

(both voting and nonvoting) stock, and about 3.64 percent of the

total nonvoting common stock.

     Louise and Edwin Barnes made the following gifts of Rock

Hill stock on December 23, 1992:

                                                   Percent of
No. of shares            Donee                        stock

    1,900           Susan B. Ellis                    1.15%
    1,900           Frances T. Barnes                 1.15
    1,900           Edwin Barnes, Jr.                 1.15

     On December 31, 1992, Edwin Barnes gave 4,500 shares of Rock

Hill nonvoting common stock to Louise Barnes.   This stock was

about 1.84 percent of the total authorized and issued common

(both voting and nonvoting) stock, and about 2.73 percent of the

total nonvoting common stock.

     Jean and John Barnes made the following gifts of Rock Hill

stock on December 26, 1992:

                                                   Percent of
No. of shares                 Donee                   stock

    1,900           John Barnes, Jr.                  1.15%
    1,900           Jean S. Barnes trust              1.15
    1,900           Charles D. Barnes trust           1.15

     On December 31, 1992, John Barnes gave 4,500 shares of Rock

Hill nonvoting common stock to Jean Barnes.   This stock was about

1.84 percent of the total authorized and issued common (both
                                -15-

voting and nonvoting) stock, and about 2.73 percent of the total

nonvoting common stock.

     Rock Hill stock and Home stock were not registered or traded

on the New York Stock Exchange, the American Stock Exchange,

NASDAQ, over the counter, or listed in National Quotation Bureau

price reports (the pink sheets).

E.   Petitioners' Gift Tax Returns and the Notices of Deficiency

     The Helmlys each agreed to treat each of their gifts as

being made one-half by the other under section 2513.   Mary Ann

and Frank Barnes, Louise and Edwin Barnes, and Jean and John

Barnes also elected to split their gifts under section 2513.

     AUS Consultants, Valuation Services Group (AUS),6 estimated

that the fair market value of Home's common stock was $230 in

1992.    Based on that estimate, the Helmlys each reported on their

1992 gift tax returns that the fair market value of Home's stock

was $230 per share.

     AUS estimated that the fair market value of Rock Hill's

nonvoting common stock was $220 on December 1, 1992.   Based on

that estimate, Frank and Mary Anne Barnes each reported on their

1992 gift tax returns that the fair market value of Rock Hill's

stock was $220 per share, and Louise and Edwin Barnes and John


     6
       The AUS appraisals were admitted into evidence for the
limited purpose of showing that they were sources of the factual
descriptions of Home and Rock Hill used in the report prepared by
respondent's expert.
                                   -16-

and Jean Barnes each reported on their 1992 gift tax returns that

the fair market value of Rock Hill's stock was $221 per share.

                             II.   OPINION

     The issues for decision are the fair market values of Home

and Rock Hill stock that petitioners gave to their children and

grandchildren in 1992.

A.   Fair Market Value

     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.     United States

v. Cartwright, 411 U.S. 546, 551 (1973); sec. 25.2512-1, Gift Tax

Regs.    The fair market value of stock is a question of fact.7

Hamm v. Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), affg.

T.C. Memo. 1961-347.     If selling prices for stock in a closely

held corporation which is not listed on any exchange are not

available, then we decide its fair market value by considering

factors such as the company's net worth, earning power, dividend-

paying capacity, management, goodwill, position in the industry,



     7
       Petitioners bear the burden of proving that respondent's
determinations in the notices of deficiency are erroneous, Welch
v. Helvering, 290 U.S. 111, 115 (1933), and respondent bears the
burden of proving the increased gift tax deficiencies resulting
from respondent's amended answers. Rule 142(a). However, on
this record, our conclusions are not affected by who bears the
burden of proof.
                               -17-

the economic outlook in its industry, and the values of publicly

traded stock of comparable corporations.   Estate of Andrews v.

Commissioner, 79 T.C. 938, 940 (1982); see sec. 25.2512-2(f),

Gift Tax Regs.   The weight to be given to these or other

evidentiary factors depends on the facts of each case.   Sec.

25.2512-2(f), Gift Tax Regs.

B.   Expert Testimony

     Both parties called expert witnesses to give their opinions

about the value of the Home and Rock Hill stock that petitioners

gave to their children and grandchildren in 1992.   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 will accept.   Parker v. Commissioner, 86 T.C. 547, 562

(1986).

     The expert witnesses at trial were:   Dr. Scott D. Hakala

(Hakala), for respondent, and George B. Hawkins (Hawkins), for

petitioner.   Their opinions and the positions of the parties as

to the per share value of Home and Rock Hill stock at issue in

these cases are as follows:
                                            -18-



                             Petitioners'   Petitioners'                           Respondent's
            Application of     returns/        expert       Deficiency   Amended      expert
 Company       discounts       petition        Hawkins        notices    answers      Hakala

Home        prediscounted                     $360.93                                  $518
stock       value

            lack of                                40%                                 25%
            marketability

            discounted           $230         $216.56          $351       $344         $389
            value

Rock Hill   prediscounted                     $336.96                                  $546
stock       value

            lack of                                45%                                 25%
            marketability

            lack of voting                        3.66%                                 5%
            power
                                              1
            discounted        $220/$221           $186.55      $375       $386         $410
            value


        1
       Hawkins said that Rock Hill stock was worth $179.03 per share
as of Dec. 30, 1992, because of the $8 special dividend payable on
Dec. 30, 1992.
                              -19-

C.   Stock Values Before Considering Discounts

     1.   Hawkins' Analysis
8
     We believe Hawkins appropriately used the income

capitalization and market or public guideline company9 methods to

appraise Home and Rock Hill stock.   He adjusted Home's and Rock

Hill's earnings per share to exclude the impact of unusual or

nonrecurring income and expense items.

     Hawkins compared 10 local or regional publicly traded

telephone companies to Home and Rock Hill.   From those companies

he derived multiples for price to latest year earnings, price to

3-year average earnings, price to latest year gross cash-flow,

price to 3-year average gross cash-flow, dividend yield or

capitalization of latest year's dividends, and dividend yield on

capitalization for 3-year average dividends.     He properly

compared dividends paid by Home and Rock Hill to those paid by

the guideline companies, excluding special nonrecurring

dividends.


     8
       The income capitalization method is used to estimate the
fair market value of income-producing property by considering the
present value of the future stream of income to be produced by
that property. See Estate of Bennett v. Commissioner, T.C. Memo.
1989-681, affd. 932 F.2d 1285 (4th Cir. 1991).
     9
       The market or public guideline company method is used to
estimate the fair market value of a company's stock by comparing
it with the stock of similar, publicly traded (i.e., "guideline")
companies.
                               -20-

     2.   Importance of Dividend Yield

     Respondent contends that Hawkins gave too much weight to the

capitalization of dividends and the capitalization of 3-year

average dividends multiples.   Respondent points out that section

25.2512-2(f)(2), Gift Tax Regs., and Rev. Rul. 59-60, 1959-1 C.B.

237, state that dividend-paying capacity should be considered in

estimating the value of closely held stock, and that the

regulation does not say to consider actual dividends.   Respondent

contends that the capitalization of dividends method is

unreliable and rarely used because the payment of dividends

allegedly has little effect on the price of stock.   We disagree.

     Hawkins gave more weight to actual dividends than to price

to earnings and price to gross cash-flow ratios because Home and

Rock Hill have significantly lower dividend payout ratios than

the guideline companies.   The dividend payout rates10 of Rock

Hill (12.62 percent) and Home (25.03 percent) were considerably

less than that of other guideline companies, whose dividend

payout rates ranged from 27.78 percent to 85.31 percent.   Six of

10 guideline companies paid dividends totaling more than 50

percent of their net income.   Hawkins testified that a public


     10
       Dividend payout equals dividends (excluding special
dividends) per share divided by the net income available per
share. It measures the extent to which the company pays its
earnings to shareholders.
                                -21-

company that has a much greater dividend payout than Home and

Rock Hill will also have higher stock prices.   Respondent made no

convincing argument in response.

     A potential buyer of Home and Rock Hill stock would

reasonably assume that Home and Rock Hill would continue to pay

low dividends.   A prospective minority shareholder of Home or

Rock Hill stock would almost exclusively consider dividend yield

rather than discounted cash-flow or income capitalization to

estimate the value of stock in either of these companies because

of the likelihood that he or she could only recoup his or her

investment through dividends.   Hawkins properly considered

dividends to be the most significant factor because they are the

principal means by which a prospective shareholder could obtain a

return on his or her investment in Home and Rock Hill.

     Where there are no sales available from which to ascertain

the fair market value of closely held stock, courts have

considered the amount of dividends which the corporation has

paid.   See Estate of Newhouse v. Commissioner, 94 T.C. 193, 217

(1990); Estate of Leyman v. Commissioner, 40 T.C. 100, 119

(1963), remanded on other grounds 344 F.2d 763 (6th Cir. 1965);

Estate of Tebb v. Commissioner, 27 T.C. 671, 675 (1957); Estate

of Oman v. Commissioner, T.C. Memo. 1987-71 (Government expert

used valuation based in part on capitalization of dividends).
                                -22-

Dividends paid can be more important than dividend-paying

capacity in appraising minority interests because a minority

shareholder cannot force the company to pay dividends even if it

has the capacity to do so.   Pratt, Valuing a Business:   The

Analysis and Appraisal of Closely Held Companies 227 (1996).

     Respondent relies on Driver v. United States, 76-2 USTC par.

13,155, 38 AFTR 2d 76-6315 (W.D. Wis. 1976), for the proposition

that dividends are not a significant factor in valuing closely

held stock.   In Driver, the decedent made gifts of a majority of

the stock in a closely held telephone company in Wisconsin.     The

donee of the stock in Driver received a majority interest in and

control of the company; in contrast, the donees of Rock Hill

nonvoting stock had no right to participate in any decision

related to the company, and the donees of Home stock had about 1

percent of the voting stock.    Thus, the donees here could not

force the companies to pay dividends or salaries.

     3.   Small Stock Premium

     Hawkins included a small stock premium11 of 5.1 percent in

calculating the discount rate he used to capitalize Home and Rock


     11
       A small stock premium is an increase in the discount rate
used to capitalize the earnings of the stock of small companies
(smaller than S&P 500) on the theory that their average rates of
return are higher than those of large companies. See Pratt,
Valuing a Business: The Analysis and Appraisal of Closely Held
Companies 165 (1996).
                                   -23-

Hill's historic earnings.       Respondent contends that Hawkins

should not have included a small stock premium.       We agree.    In

Estate of Jung v. Commissioner, 101 T.C. 412, 444 (1993), we

declined to apply a small stock premium because the taxpayer's

expert did not provide evidence that an investment in the

corporation in question was riskier simply because of its small

size.     Like the expert in Estate of Jung, Hawkins did not show

that Home and Rock Hill were riskier merely because they are

small.     On the contrary, he concluded that Home and Rock Hill are

financially sound and that investments in Home and Rock Hill were

much less risky than in other comparably sized companies since

the business of Home and Rock Hill is highly regulated.

     4.     Hakala's Analysis

     We believe that Hakala did not adequately consider that:

(a) Neither Home nor Rock Hill stock is likely to be sold, (b)

the Barnes and Helmly families intend to retain control of their

companies, (c) Home and Rock Hill paid low dividends, (d) Rock

Hill nonvoting stock had no right to participate in any decision

related to the company and Home voting stock had about a 1-

percent vote that was ineffectual, and (e) an owner of a 1-

percent interest in either Home or Rock Hill would find it hard

to resell his or her interest.      Hakala admitted that Rock Hill

will not be sold or taken public.
                                 -24-

     Hakala used the market or guideline company approach to

estimate the value of Home and Rock Hill stock, but he excluded

three companies that Hawkins used as comparables12 because he did

not have their market trading prices as of the valuation date.

In contrast, Hawkins apparently easily obtained the stock prices

by contacting the companies.

     Because of errors in preparing Hakala's report, key data

relating to the discounted cash-flow method for Home and Rock

Hill was not available at trial for petitioners to cross-

examine.13    Thus, we could not consider Hakala's discounted cash-

flow method without prejudicing petitioners.    We could consider

only Hakala's market guideline method, which weakened the

persuasiveness of his opinion.

     Unlike Hawkins, Hakala did not visit Home or Rock Hill,

interview the management of Home or Rock Hill, or make any other

factual investigation.

     5.      Conclusion

     We conclude that Hawkins' methodology was reasonable, except

for his use of a small company stock premium.


     12
       Hakala did not use as comparables Concord Telephone, Mid-
Plains Telephone, and North Pittsburgh Systems.
     13
       We denied respondent's posttrial motion to reopen the
record to supplement Hakala's report because of the risk of
prejudice to petitioners.
                               -25-

D.   Discounts

     1.    Lack of Marketability

     A discount for lack of marketability may apply to minority

interests in closely held corporations because there is no ready

market for those shares.   Estate of Andrews v. Commissioner, 79

T.C. at 953.   Respondent agrees that petitioners are entitled to

lack of marketability discounts for Home and Rock Hill stock.

     Hawkins applied a 40-percent discount for lack of

marketability to his estimate of the value ($360.93) of the Home

stock, and a 45-percent discount to the value ($337.87) of the

Rock Hill stock.   Hakala applied discounts of 25 percent for lack

of marketability to his estimate of the values of the Home ($518)

and Rock Hill ($546) stock.

     We agree with Hawkins' use of 40 and 45 percent discounts

because:   (a) The Barnes family has controlled Rock Hill for 80

years and the Helmly and Barnes families have controlled Home for

50 years; (b) both families intend to keep control of the

companies; (c) the families have taken steps such as implementing

a voting trust, bringing the younger generations into the

business, and buying insurance to avoid having to sell shares to

pay death taxes; (d) Home and Rock Hill pay much lower dividends
                               -26-

than the guideline companies;14 (e) there have been no sales of

Rock Hill stock and only limited family and insider sales of Home

stock at about book value; (f) the Home and the Rock Hill stocks

are not registered or traded on any exchange or over the counter;

and (g) the Home and the Rock Hill stocks represent very small

minority interests that have no ability to direct the affairs of

either company or cause the sale of its assets.   These facts

support application of an above average discount for lack of

marketability.

     Respondent disagrees with Hawkins' use of some studies of

sales of restricted stock and initial public offerings which

respondent claims contained errors.   Respondent also asserts that

the companies in the studies used by Hawkins were not comparable

to Home and Rock Hill.   Respondent points out that Hawkins did

not relate the companies in the studies to Home and Rock Hill in

terms of marketability, size, profitability, history, risk,

speculativeness, or growth.   However, Hakala also failed to

compare the companies in the studies to Home and Rock Hill on

those points.

     Hawkins and Hakala mostly cited the same studies.     Hakala

cited eight studies in which the average discount for lack of

marketability ranged from 30 percent to 60 percent.   He



     14
        Stocks with low dividends typically suffer more from lack
of marketability than stocks with high dividends. Pratt, supra
at 358.
                                -27-

acknowledged that the typical discount cited for restricted

stock15 is 35 percent and said that the unregistered stock in a

closely held corporation is subject to a larger discount than

that applied to restricted stocks.      His explanation of his use of

a 25-percent discount for lack of marketability was not

convincing.

     2.     Nonvoting Stock

     Prospective buyers will pay a premium for shares with voting

power or obtain a discount for nonvoting shares.      Wallace v.

United States, 566 F. Supp. 904, 917 (D. Mass. 1981) (voting

shares appraised 5 percent higher than nonvoting shares); Kosman

v. Commissioner, T.C. Memo. 1996-112 (nonvoting shares discounted

by 4 percent); Estate of Winkler v. Commissioner, T.C. Memo.

1989-231.

     Hawkins applied a discount of 3.66 percent for lack of

voting power to the value ($337.87) of the Rock Hill stock.

Hawkins based this discount on a study of 43 public companies

with voting and nonvoting shares.      The study found that the

average discount for nonvoting stock was 3.66 percent.      Hakala

discounted the nonvoting stock of Rock Hill by an additional 5

percent.    We find that Hawkins' use of a 3.66-percent discount

for nonvoting stock was reasonable.



     15
       Under SEC Rule 144(b), 17 C.F.R. sec. 230.144 (1984),
restricted securities eventually become freely tradeable through
either registration or the passage of time.
                                 -28-

     3.   Conclusion--Discounts

     Based on the arguments of the parties and the record, we

conclude that discounts for lack of marketability of 40 percent

for the Home stock and 45 percent for the Rock Hill stock are

appropriate.   We further conclude that a 3.66-percent discount

for nonvoting stock is appropriate for the Rock Hill stock.      See

Estate of Lauder v. Commissioner, T.C. Memo. 1994-527 (40%

discount for lack of liquidity or marketability); Martin v.

Commissioner, T.C. Memo. 1985-424 (70% discount for

marketability/minority considerations).

E.   Conclusion

     We conclude that the fair market value per share of the

stock of Home that the Helmlys gave to their children and

grandchildren was $227.41 per share in January and December 1992,

and that the fair market value of the stock of Rock Hill that the

Barneses gave to their children was $201.12 per share on December

22, 23, and 26, 1992, and $193.34 per share on December 30,

1992.16

     To reflect the foregoing,


                                             Decisions will be entered

                                        under Rule 155.



     16
       The values of Home and Rock Hill stock reported on
petitioners' returns ($230 and $220/$221 respectively) are
admissions by petitioners and will not be overcome without cogent
evidence that they are wrong. Waring v. Commissioner, 412 F.2d
800, 801 (3d Cir. 1969), affg. per curiam T.C. Memo. 1968-126;
Estate of Hall v. Commissioner, 92 T.C. 312, 337-338 (1989).
Petitioners have met this burden.
